Investor Protections and Stock Market Participation: An Evaluation of Financial Advisor Oversight

Abstract: We examine a regulatory change in Canada that increased the oversight of financial advisors in five of its ten provinces. This increased oversight of mutual fund dealers reduced households' use of financial advice and their mutual fund holdings. In lieu of mutual funds, households increased their cash holdings. The results are consistent with a decline in delegated investing caused by a negative shock to the supply of advice. Our estimates suggest financial advisors are important in facilitating stock market participation, particularly among low-wealth households. Investments and advisory channels not affected by the regulation - direct equity holdings and bank-affiliated advisors - show no effects, reducing concerns about confounding economic and financial market changes.